Accountants can draw some comfort following the recent Court of Appeal decision in Mehjoo v Harben Barker (HB).
The Midlands based accountancy firm have won an appeal overturning a previous court ruling that the firm had acted negligently in failing to advise Mr Mehjoo to seek specialist tax advice.
Mr Mehjoo was an Iranian businessman who instructed HB to provide accounting services and to advise generally in relation to his tax and other financial and business affairs.
Mr Mehjoo asserted that he had retained his Iranian domicile of origin for UK tax purposes and sued HB for £1.4 million after the firm failed to recommend he use a complex tax avoidance scheme in order to reduce his capital gains tax liabilities on the disposal of his business by using a bearer warrant scheme.
HB’s engagement letter said that in addition to normal tax services (preparation and filing of returns and so on) they would provide “general” advice and would, if requested, also provide “more extensive” tax advice. HB were not retained to advise in relation to the sale of the business but were asked to provide “general” tax advice on the sale – which they did. The question was whether they should have gone further to provide advice on the tax implications of Mr Mehjoo’s domicile. It was not alleged they should have advised on the bearer warrant scheme.
It was accepted that on many occasions HB had offered advice to Mr Mehjoo on aspects of his business and personal financial affairs, which included providing some tax advice. Lord Justice Patten did not, however, accept that this “advice” amounted to a course of conduct from which the court should imply a change in the terms of HB's written retainer obliging them to provide complex advice.
The giving of general tax advice was undoubtedly part of the existing retainer but it was difficult to see why a duty to advise on such matters should be extended in the case to include a duty to give specialist tax planning advice – specifically on Mr Mehjoo’s domicile. HB were not and had never held themselves out to be specialist tax planners and had never given Mr Mehjoo advice of that sort.
The Court of Appeal has made it clear that an accountant’s obligations are limited to those set out in the engagement letter unless there is a clear agreement (which can be inferred from conduct) otherwise.
It is now more important then ever that the engagement letter is clear and concise. Ensure the letter reflects the nature of the work to be carried out and only advise on matters specified in it.
The ruling is a boost for accountancy firms generally. They do not have a general duty to recommend specific tax planning schemes to their clients unless they specifically offer this service to their clients.